Is General Electric Company on the Cusp of Its Biggest Deal Ever?

Reports reveal what GE might plan to do with its $57 billion dollar pile of cash overseas.

Last week, General Electric's management team hinted that a big buying opportunity could be just around the corner, but Wednesday's shareowners meeting came and went with no further revelations in that vein.

Thursday morning, however, news broke from Bloomberg that the industrial giant could be on the cusp of its largest deal ever. The buyout target, according to unnamed Bloomberg sources, is the French builder of power plants and transmission gear, Alstom SA. The potential merger has yet to be validated by GE or Alstom executives, but shares of the French conglomerate nonetheless spiked higher by 11% in response to the speculation. GE, meanwhile, is trading slightly higher since the rumors started swirling.

Recognized as one of the premier industrial outfits in France, Alstom could fetch a price tag of $13 billion, which would make it GE's largest acquisition ever. Despite the sticker shock and regulatory hurdles, the deal would be a savvy move to deploy GE's mountain of cash overseas.

Packing on the powerOne of the reasons the market responded positively to Bloomberg's reports is that a deal that matched GE with Alstom makes sense on several levels. Currently, GE's in the process of pivoting toward industrial operations, specifically emphasizing power and energy over its lending operations, and therefore the company is on the prowl for opportunities that pack more manufacturing punch. I outlined GE's 2013 buyout strategy in detail recently, noting that the company deployed roughly $9 billion to snatch up everything from aviation operations to Texas oil and gas outfits.

A tie-up with Alstom, which would theoretically exclude Alstom's high-speed rail manufacturing due to regulatory concerns, would incorporate a strong mix of additional industrial firepower into GE's portfolio. The French outfit, which faced a near-bankruptcy back in 2004, has rebounded and is a global leader in energy generation through nuclear and wind turbines and widely recognized in the power transmission field as well. For GE, deploying $13 billion to tack on these businesses to its power and energy divisions would pay off through potentially lucrative new client relationships. It would also expand the breadth of GE's power and energy businesses, which brought in a combined $32 billion in revenue in 2013.

What's more is GE is currently sitting on approximately $57 billion in foreign cash reserves, which is an unusually idle asset for the company. GE's CEO Jeff Immelt has been hesitant to repatriate that stash of cash due to tax concerns in recent years, a move that virtually eliminates the industrial giant's ability to repurpose it in a shareholder-friendly manner, namely for dividends or buybacks.

So, should America's largest manufacturer execute a deal with the French industrial powerhouse Alstom, the outcome from my perspective would be favorable for GE shareholders. Yes, it's true that mergers fail as often as they succeed, but GE's track record shows the company zeroes in on key attributes before pulling the trigger. As Immelt noted in last week's earnings call, GE follows the same approach for acquisitions large and small: "Our target remains $1 billion to $4 billion; but we have gone above on opportunistic deals that have excellent values, strong synergies, fit our growth strategies, and are immediately accretive."

The key takeaway is that acquisitions are both accretive to earnings in the near term and strategic for GE to increase its long-term competitive advantage. It's a buyout approach that's allowed GE's overall energy business to double between 2006 and 2013, reaching nearly $50 billion in revenue last year. With Alstom, the biggest hurdle would not be finding synergies between the business but the cultural challenges of integrating a long-standing French company. Fortunately, GE has more than 300,000 employees all over the world, so the task of bringing additional international operations into the fold isn't incredibly daunting.

Where do we go from here?While neither company has confirmed that a merger is on the horizon, the news dovetails with the speculative comments made by GE during last week's earnings conference call. Furthermore, the sources at Bloomberg disclosed substantial detail about the possible tie-up, including details like GE's belief that it can bolster Alstom's operating margin by 3% in the relatively near future.

Instead of sitting on a massive pile of cash overseas, GE's obviously looking for ways to deploy that capital into promising industrial businesses. Alstom surely fits the bill, but for now shareholders have to wait and see what's in store over the next few days.

Author

Isaac covers the companies that constantly push the world forward, from the engines of innovation like GE and Google to the rule breakers like Chipotle and Whole Foods. He admires the leaders that embody the philosophy of Conscious Capitalism.
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